How can premium financing of life insurance help high net worth individuals (HNWI)?
Premium financing of life insurance can help high-net-worth individuals (HNWI) by maximizing use of capital, avoiding lost opportunity costs and gaining tax advantages.
HNWIs are usually accustomed to using financial leverage to maximize the use of their capital, and life insurance premium financing offers another opportunity to leverage costs. HNWIs typically need far greater amounts of life insurance than people earning lower incomes; they have larger family income needs to consider and must consider business and inheritance issues. They also have more tax concerns because their income may be subject to higher tax rates. Financing their life insurance premiums rather than paying such premiums outright can offer an opportunity to use financial leverage, retain capital and gain maximum investment returns.
Many HNWIs earn excellent returns on invested capital. If they can finance $100,000 a year in insurance premiums at just 3% or 4% interest while using that amount of money elsewhere to earn a 10% to 12% return on investment, then it is advantageous to avoid the lost opportunity cost they would incur by paying the premiums without using financing. Tax considerations may make financing premiums even more attractive to such individuals. If, for example, they need to liquidate existing investments to pay the life insurance premiums, the liquidation may lead to incurring a capital gains tax of 20% of more, making the actual effective cost of paying $100,000 in insurance premiums as much as $120,000 or more.
Another potential tax issue for HNWIs arises if their life insurance is held in trust. In that case, premium financing can additionally help reduce potential gift taxes.
Life insurance is usually a major investment for HNWIs. Therefore, it is appropriate for them to consider the best means of managing that investment, along with other potential investment opportunities, and consider leveraging to pay their insurance premiums.